A Note on Emissions Taxes and Incomplete Information
University of Massachusetts Amherst Department of Resource Economics Working Paper No. 2008-5
13 Pages Posted: 29 Jul 2008
Date Written: July 29, 2008
Abstract
In contrast with what we perceive is the conventional wisdom about setting emissions taxes under uncertainty, we demonstrate that setting a uniform tax equal to expected marginal damage is not generally efficient under incomplete information about firms' abatement costs and damages from pollution. We show that efficient taxes will deviate from expected marginal damage if there is uncertainty about the slopes of the marginal abatement costs of regulated firms. Moreover, efficient emissions tax rates will vary across firms if a regulator can use observable firm-level characteristics to gain some information about how the firms' marginal abatement costs vary.
Keywords: Emissions Taxes, Incomplete Information, Uncertainty
JEL Classification: L51, Q28
Suggested Citation: Suggested Citation
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